It’s the Entitlements, Stupid

from John Cochrane in his excellent blog, The Grumpy Economist, Why Not Taxes?

Let us take the estimate that the recent tax cut cost $1.5 trillion over 10 years, i.e. $150 billion per year or 0.75% of GDP. Compared to the $800 billion current deficit it’s small potatoes. Compared to the 5 percent to 10 percent of GDP we need to find in the sock drawer, it’s peanuts. (Compared to the $10 trillion or more racked up in the last 10 years it’s not huge either!)

[Update: Thanks to commenters, I now notice the “had been expected.” OK, we expected 4% of GDP deficits, and then they passed a tax cut and now it’s 5% of GDP. But our article, and the economy is about the overall deficit. The problem we are talking about is what had been expected, not the recent minor change!]

Here is what the CBO has to say about it:

For the next few years, revenues hover near their 2018 level of 16.6 percent of GDP in CBO’s projections. Then they rise steadily, reaching 17.5 percent of GDP by 2025. At the end of that year, many provisions of the 2017 tax act expire, causing receipts to rise sharply—to 18.1 percent of GDP in 2026 and 18.5 percent in 2027 and 2028. They have averaged 17.4 percent of GDP over the past 50 years.

17, maybe 18. We’re waddling around in the 1% range, when the problem is in the 10 percent range. The long run budget problem has essentially nothing to do with the Trump tax cut. It has been brewing under Bush, Obama, and Trump. It fundamentally comes from growth in entitlements an order of magnitude larger.

It is simply not true that “The primary reason the deficit in coming years will now be higher than had been expected is the reduction in tax revenue from last year’s tax cuts, not an increase in spending.”

To call us “dishonest” for merely repeating what’s been in every CBO long term budget forecast for the last two decades really is unworthy of these economists’ stature.